The Trustees of the Old-Age and Survivors Insurance (OASI) trust fund provide an annual report on the current and projected financial status of the Social Security program. Based on prior reports, the Social Security program faces a significant financing issue. Reports indicate that trust fund reserves will be depleted between 2033 and 2035. At that time, continuing income for the fund will only pay around 75-80% of scheduled benefits. This expected shortfall has drawn attention heading into the 2024 election year.
OASI is financed almost exclusively by payroll taxes, income tax on Social Security benefits, and interest on trust fund reserves. Payroll contributions consist of taxes paid by employees, employers, and the self-employed. For 2024, the employee pays 6.2% and the employer pays 6.2% on earnings up to a wage base of $168,600, with no tax imposed on income above that level.
According to the American Academy of Actuaries, reform is necessary for Social Security to remain sustainable for future generations. Here are some of the proposed solutions to the Social Security financing issue:
- Reduce benefits for high-income individuals who have not yet claimed Social Security benefits.
- Gradually raise the Full Retirement Age from 67 to 69. This change would be implemented for workers currently in their 30s and 40s.
- Reduce annual Cost of Living Adjustments (COLA). COLA reductions would be cumulative over time, meaning beneficiaries who tend to receive benefits longer than average would experience larger benefit reductions.
- Maintain the wage base but increase the Payroll Tax by 25%- from 6.2% for both worker and employer to 7.75%.
- Tax earnings above the $168,600 wage base. Proposals have included taxing up to $400,000 of earnings or taxing all earnings.
- Set Social Security benefits to a flat amount. High-income individuals would see reductions in benefits, while low-income individuals may see larger benefits than compared with the benefits under current law.
Lawmakers have several options for improving the outlook of the Social Security program. The key to addressing the financial shortfall is a timely, proactive response. Gradual change(s) will allow workers time to adjust their expectations and behaviors and allow a larger demographic to share in revenue increases or scheduled benefit reductions. For example, future beneficiaries of the program may increase savings to offset the reduction in Social Security benefits and older workers may work more hours or delay retirement longer than they would have if benefits remained unchanged.
Keep an eye out for Part Two of this series in our upcoming newsletter where we will discuss retirement and survivor benefits under Social Security. Taking what you will learn from both articles, you will have a better understanding of how proposed changes may impact you as a current or future beneficiary of this program.
